mortgage-backed securities litigation: new theories,...
TRANSCRIPT
Mortgage-Backed Securities Litigation:
New Theories, New Defendants Pursuing and Defending Investors, Issuers, Underwriters and Other Stakeholders in MBS Claims
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
TUESDAY, JANUARY 7, 2014
Presenting a live 90-minute webinar with interactive Q&A
Isaac M. Gradman, Attorney, Perry Johnson Anderson Miller & Moskowitz, Santa Rosa, Calif.
James K. Goldfarb, Partner, Murphy & McGonigle, New York
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-888-450-9970 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail [email protected] immediately so we can
address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
For CLE purposes, please let us know how many people are listening at your
location by completing each of the following steps:
• In the chat box, type (1) your company name and (2) the number of
attendees at your location
• Click the SEND button beside the box
If you have purchased Strafford CLE processing services, you must confirm your
participation by completing and submitting an Official Record of Attendance (CLE
Form).
You may obtain your CLE form by going to the program page and selecting the
appropriate form in the PROGRAM MATERIALS box at the top right corner.
If you'd like to purchase CLE credit processing, it is available for a fee. For
additional information about CLE credit processing, go to our website or call us at
1-800-926-7926 ext. 35.
FOR LIVE EVENT ONLY
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
FOR LIVE EVENT ONLY
Copyright © 2014 Isaac M. Gradman
Strafford Webinar
January 7, 2014
Isaac M. Gradman, Esq.
Mortgage Backed Securities
Litigation: Year-in-Review
1/7/14 5
Copyright © 2014 Isaac M. Gradman 1/7/14 6
Copyright © 2014 Isaac M. Gradman
Three Types of MBS Claims
1/7/14 7
Federal and State Securities Law Claims – easy to file, easy to win
Easy to file: any original purchaser can sue issuer
Easy to win: no intent, causation or reliance (strict liability); remedy provides rescission
Caveat: 3 year statute of limitations (“SOL”), 1 year statute of repose
Fraud and Negligence Claims – easy to file, hard to win
Easy to file: no contractual privity or standing requirements, 6/2 SOL/SOR
Hard to win: must plead with specificity; must prove knowledge, intent, reliance and causation
Caveat: may be limited by availability of contractual remedies
But note: may carry punitives
Contractual Repurchase Claims (i.e., Putbacks) – hard to file, easy to win
Hard to file: must have 25% Voting Rights, obtain & review files, direct and indemnify Trustee, and provide opportunity to cure, all before filing
Easy to win: loan files offer concrete evidence of breaches; need not prove damages; 6 year SOL (but from when?); positive legal developments
Caveats: freerider issues; only partial relief
Copyright © 2014 Isaac M. Gradman
Takeaways From 2013 Putback Actions
1/7/14 8
Monoline actions reach inflection point
Putback standards become better defined (materiality,
liquidated loans)
BofA-BNYM Settlement spotlights conflicts of
interest
JPMorgan Global Settlement takes different approach
New York Appellate Court defines appropriate SOL
Copyright © 2014 Isaac M. Gradman
AGO v. Flagstar
1/7/14 9
Background
Assured sought $111 million in losses across 2 HELOC trusts it had guaranteed
Alleged over 75% of loans had material breaches
Flagstar maintained that current loans and loans that went bad due to “life events” were exempt from repurchase
Bench trial conducted at end of 2012 before J. Rakoff
Opinion issued February 5, 2013:
Awarded AGO $90 million in damages – later raised to $106.5 million
Accepted statistical sampling
Rejected loss causation theory
Copyright © 2014 Isaac M. Gradman
AGO v. Flagstar (cont.)
1/7/14 10
Key Findings: Cure or repurchase not limited to defaulted or delinquent loans
“It is irrelevant to the Court’s determination of material breach what Flagstar believes ultimately caused the loans to default…Risk of loss can be realized or not; it is the fact that Assured faced a greater risk than was warranted that is at issue.”
“Fraud is inherently material”
Notice of pervasive breaches put Flagstar on constructive notice of all breaches
Sole remedy does not preclude AGO from bringing damages claims for failure to repurchase.
Only two reps account for all breaches (compliance with guidelines and no fraud)
Copyright © 2014 Isaac M. Gradman
MBIA v. Countrywide
1/7/14 11
MBIA claims $4.8 billion of losses across 15 deals
Claims include fraud, putbacks, and successor liability
BofA loses Article 78 Transformation ruling in March 2013
Summary Judgment rulings handed down in April:
Successor liability claims survive – governed by NY Law
Loss causation rejected
First Department ruling on April 2, 2013 puts final nail in coffin – PSAs do not limit repurchase to defaulted loans
Bransten extends finding to all deals
No Default Rep includes borrower misreps
MBIA not limited to repurchase remedy
Sampling OK
Copyright © 2014 Isaac M. Gradman
MBIA v. Countrywide Settlement
1/7/14 12
Settlement reached May 6, 2013
Terms
$1.6bn in cash and $137mm of principal amount of
MBIA 5.7% senior notes.
$7.4B in commuted CDS, reduced MBIA exposure of
an estimated $5.8B.
$500mm line of credit
BofA receives warrants to purchase 9.94mm shares of
MBIA common stock at a price of $9.59 per share.
(estimated at $47mm as of deal closing)
Resolves all issues between the parties, but not
before damage done (precedents)
Copyright © 2014 Isaac M. Gradman
Flurry of Monoline Settlements
1/7/14 13
May 2: MBIA settles with Flagstar - $110
mm paid
May 6: AGO settles with UBS - $358 mm
and portion of future losses
June 21: AGO settles with Flagstar - $105
million + reimbursement of future claims
July 9: CIFG settles with Goldman and
GreenPoint (terms undisclosed)
Copyright © 2014 Isaac M. Gradman
Can Private Investors Take Advantage?
1/7/14 14
After ACE Decision, only if they have tolling, claim accrual provisions or facts supporting equitable tolling
Judge Kornreich, in ACE 2006-SL2 (HSBC) v. Deutsche Bank, had ruled that breach does not occur until denial of repurchase obligation. Bases opinion on:
CPLR sec. 206 – where demand necessary to commence action, SOL runs when right to make demand is complete
Where K provides for continuing performance, each breach begins the running of the statute anew
Before suit, responsible party must be notified, and be provided opportunity to cure or repurchase. Only then does responsible party have duty.
Disagrees with Daiwa – nature of parties’ relationship makes this ruling inapplicable
On December 19, First Department overturns Kornreich
Holds that 6 year SOL runs from time reps are made.
Holds no relation back to original filing since original parties lacked standing (even though no finding in this regard)
Anomalous holding: claims filed before expiration of 60/90-day cure/repurchase period are both too early and too late
Case likely to be appealed up to highest Court in New York
Copyright © 2014 Isaac M. Gradman
BNYM-BofA Countrywide Settlement - Terms
1/7/14 15
By the numbers 530 Countrywide RMBS Trusts
$424 bn in original face value Countrywide bonds
Over $100 bn in losses at time deal announced
$8.5 bn settlement amount (<8¢ per $ of then-existing losses)
Releases All putback claims on Countrywide deals except monoline-
wrapped deals
Does not release fraud or securities claims
Does not release claims on BofA or Merrill Lynch-sponsored deals
Posture – Article 77 proceeding (special vehicle under NY Law) completed, case under submission
Copyright © 2014 Isaac M. Gradman
BNYM-BofA Countrywide Settlement - Key Assumptions
1/7/14 16
$8.5 bn number based primarily on work of Brian Lin
Accepted BofA data – that breach rate would
approximate 36% Freddie/Fannie putback rate (rather
than >80% rate commonly found in PLS)
Applies low default rate assumptions, litigation haircuts
Assumes viable defenses available to putbacks
Subjectivity of underwriting decisions
Loss causation showing required
BAC can ring-fence Countrywide
BNYM conducts no loan reviews due to cost
Copyright © 2014 Isaac M. Gradman
Settlement Assumptions Mirror Putback Claim Fallacies Asserted by BofA
1/7/14 17
Copyright © 2014 Isaac M. Gradman
Fallacy #1: Guidelines Lax; Breaches Hard to Prove
1/7/14 18
Copyright © 2014 Isaac M. Gradman
“If you think about people who come back and say, I bought a Vega, Chevy Vega, but I want it to be a Mercedes with a 12-cylinder, we’re not putting up with that.”
– CEO Brian Moynihan, BofA Q3 2010 earnings call.
1/7/14 19
Copyright © 2014 Isaac M. Gradman 1/7/14 20
Copyright © 2014 Isaac M. Gradman
Fallacy #1: Guidelines Lax; Breaches Hard to Prove
1/7/14 21
Stated income loans had clear guidelines
Blatant red flags
Doctored documents
Non arms-length transactions
Identity theft
Fitch Special Report, The Impact of Poor Underwriting Practices and
Fraud in Subprime RMBS Performance (Nov. 28, 2007), finds misreps
evident in loan files and easily detectable
Exceptions require documented compensating factors
Legal rulings support personal experience
Judge Rakoff easily spots breaches in Assured Guaranty v. Flagstar
Judge Bransten interprets reps broadly
Liquidated loans exclusion in US Bank v. WMC Mortgage Corp. an
aberration
Copyright © 2014 Isaac M. Gradman
Fallacy #2: Investors Must Prove Causation
1/7/14 22
Copyright © 2014 Isaac M. Gradman
“We believe many of the losses observed in these deals have been, and continue to be, driven by external factors, like the substantial depreciation in [home] prices, persistently high unemployment and other economic trends, diminishing the likelihood that any loan defect should one exist at all, was the cause of the loan’s default.”
– CFO Chuck Noski, BofA Q3 earnings call
1/7/14 23
Copyright © 2014 Isaac M. Gradman
Fallacy #2: Investors Must Prove Causation
1/7/14 24
Standard: “materially and adversely affects”
value of loan or stakeholder’s interest in
loan
No language suggesting causation
PSAs provide situations where current loans
may be put back.
Copyright © 2014 Isaac M. Gradman
Fallacy #2: Investors Must Prove Causation
1/7/14 25
Court decisions have substantiated most straightforward interpretation, resulting in death of this defense
Syncora v. EMC – J. Crotty finds increased risk of loss is material adverse affect in insurance context
Assured v. Flagstar – J. Rakoff finds no causation language and issues broad holding in favor of plaintiffs’ materiality interpretation
MBIA v. Countrywide – J. Bransten sides with plaintiffs in analogous contexts, but punts on private claims until First Department extends her holding for her. This is now governing law
Impact – extremely tough to prove causation; relatively easy to prove increased risk
Keith Johnson testimony before FCIC – sellers used exception reports to bargain down loan prices.
Expert testimony from underwriters and insurers
Rakoff finds simple failure to check increases risk, even if underwriter “gets lucky”
Copyright © 2014 Isaac M. Gradman
Fallacy #3: BofA Can Ring-Fence Countrywide
1/7/14 26
Copyright © 2014 Isaac M. Gradman
Fallacy #3: BofA Can Ring-Fence Countrywide
1/7/14 27
Two prominent theories of successor liability De facto merger – BofA acquisition of Countrywide amounted
to merger Turns on which state’s law applies
New York asks if it was intent of successor to absorb and continue operation of predecessor
Delaware requires some bad faith or intent to defraud creditors
Judge Bransten in MBIA v. Countrywide held on summary judgment that New York law applied and throws out fair value test (two pillars of Daines’ opinion)
Assumption of liabilities – BofA implicitly or by admission assumed liabilities after fact Judge Bransten in MBIA v. Countrywide finds no reliance needed
Rarely found by courts, but some good facts here, including:
Backstopping of Countrywide in Article 77 and elsewhere
And public comments…
Copyright © 2014 Isaac M. Gradman
“Our company bought it [Countrywide] and we’ll stand up, we’ll clean it up.”
“At the end of the day, we will pay for the things that Countrywide did.”
1/7/14 28
– CEO Brian Moynihan, Nov. 2010 BofA investor conference in NYC (Bloomberg News).
– CEO Brian Moynihan, Dec. 2010 (New York Times).
Copyright © 2014 Isaac M. Gradman
“We bought the company [Countrywide] and all of its assets and liabilities… We are aware of the claims and potential claims against the company and have factored those into the purchase.”
– BofA Spokesman Scott Silvestri, March 1, 2008
1/7/14 29
“We looked at every aspect of the deal, from [Countrywide’s] assets to potential lawsuits and we think we have a price that is a good price.”
– Former BofA CEO Kenneth Lay, Jan. 23, 2008
Copyright © 2014 Isaac M. Gradman
BNYM-BofA Countrywide Settlement – Late Developments
1/7/14 30
J. Kapnick rules on May 20 that Objectors demonstrated colorable claims of conflict and self dealing against BNYM based on:
1. Event of default and Trustee’s related decision to enter into forebearance agreement;
2. Trustee’s decision not to provide notice to the certificateholders before settlement was reached; and
3. Broad release of claims BNYM sought for itself at any point before settlement was reached.
Trial began June & concluded November 2013. Extensive testimony and cross examination of BNYM reveals several conflicts:
Counsel could not sue
Trustee derives majority of work from BofA; BofA provides blanket indemnity and pays fees
Best efforts clause - BNYM counsel admits PSA amendment, means objector arguments fall on deaf ears
Experts show lack of diligence, accept BofA data
Kapnick now deliberating – likely to take anywhere from 6-9 months.
Copyright © 2014 Isaac M. Gradman
Testimony Leaves Distinct Impression of Conflicted Trustee
1/7/14 31
Copyright © 2014 Isaac M. Gradman
J.P. Morgan Settlement – A Different Animal
1/7/14 32
By the numbers
330 JPM/Bear Stearns RMBS Trusts (no WaMu)
$295 bn in original face value Countrywide bonds
Est. $56-75 bn in losses
$4.5 bn settlement amount (6-8¢ per $ of losses, 1.5¢ per $ of original face)
21 Institutional Investors support the deal
Releases
All putback claims on JPM deals except monoline-wrapped deals and WaMu deals (includes notice obligations and 3rd party enforcement obligations)
Claims related to missing documentation
Servicing claims
Does not release
Fraud or securities claims
Claims against 3rd party originators
Claims brought by insurers or 3rd party guarantors
Posture – binding offer to trustees
Copyright © 2014 Isaac M. Gradman
J.P. Morgan Settlement – A Different Animal (cont.)
1/7/14 33
How is this different from Countrywide?
7 Trustees versus 1 (BoNY)
Trustees did not participate in negotiations or sign onto
deal (yet)
Trustees may consult with investors, review documents
(due diligence) and hire own experts
Not all-or-nothing – appears that Trustees can opt-in on
deal-by-deal basis.
No global court proceeding, Trustees can choose whether
to seek court approval for decision to settle
JPM can pull out if certain pct. of deals opt out.
Copyright © 2014 Isaac M. Gradman
What to Watch For in 2014
1/7/14 34
Appeal of First Department SOL Decision Should know within next few weeks whether appeal will be
sought (likely)
Will know within 4 mos. whether Court will hear appeal (discretionary)
If so, briefing completed within 2-3 mos.
Oral argument will be 1-2 mos. later, followed by 1-3 mos. of deliberation (looking at a year at the outside for decision)
Private label cases mature SOL Exceptions – accrual language, tolling (equitable and
contractual)
Sole remedy interpretation in PLS context
Settlements or trial
BofA and JPM Settlements – templates or headaches?
Copyright © 2014 Isaac M. Gradman
Contact
1/7/14 35
Isaac M. Gradman
Attorney
Perry Johnson Anderson Miller & Moskowitz
LLP
(707) 535-1002
http://www.perrylaw.net/attorneys/gradman.asp
• Mr. Gradman is one of country’s leading experts in mortgage-backed securities litigation and other
mortgage crisis legal issues. While practicing as a commercial litigator at Arnold & Porter
(formerly Howard Rice) in San Francisco, Mr. Gradman was involved in some of the earliest
litigation arising from the subprime mortgage crisis, including representing PMI Mortgage Insurance
Co. in a suit against WMC Mortgage Corp. and its parent, GE Money Bank, over misrepresentations
relating to a $1 billion pool of subprime mortgages.
• Prior to joining Perry, Johnson, Anderson, Miller & Moskowitz in 2012, Mr. Gradman was the
managing member of Gradman Law. At Gradman Law, he represented clients in loss mitigation,
litigation and putback efforts in connection with mortgage derivatives and insurance products.
• Mr. Gradman received his B.A. in Political and Social Thought with Highest
Distinction in 2002 from the University of Virginia, where he was a Jefferson
Scholar, an Echols Scholar and a member of the Raven Honor Society. He received
his J.D. cum laude from NYU School of Law in 2005, where he was a Dean’s
Scholar and a Robert McKay Scholar. Isaac also clerked for two years for the Hon.
Joan Lenard in the United States District Court in the Southern District of Florida.
James K. Goldfarb
Strafford Webinar
January 7, 2014
Put-Back Developments
◦ Ace implications
◦ “Liquidated Loans” argument
Securities Litigation/Class Action
◦ Statutes of Limitations/Repose
◦ Class Standing
Issues to watch in 2014
◦ Indemnification
◦ Settlement
◦ FIRREA
37
Beginning of the end?
38
What is the benefit of the bargain?
◦ Defendants: specific performance (cure-or-repurchase)
◦ Plaintiffs: make-whole
◦ Courts
Plain language
Policy and commercial considerations
39
Issues
◦ When do put-back actions accrue?
◦ Does a refusal to cure-or-repurchase give rise to a cause of action for
breach that is independent of a cause of action for breach of the
underlying representations and warranties?
◦ Is notice for one notice for all?
Ace
◦ Breach of contract claims accrue when representations and warranties
are made.
◦ Pre-suit cure-or-repurchase demand is a “condition precedent” to filing a
summons with notice.
ACE Sec. Corp. Home Equity Loan Trust, Series 2006-SL2 v. DB Structured Prods., Inc.,
--- N.Y.S.2d ---, 2013 WL 6670379 (App. Div. 1st Dep’t Dec. 19, 2013).
40
Rooted in well-established law
◦ Confirms New York’s long-established rule that contract claims accrue
when a breach occurs (when the representations and warranties are
given), and not when it is discovered.
◦ Confirms that breach of the cure-or-repurchase remedy is not
independently actionable.
Implications
◦ Dispatches the argument that a new cause of action – with its own
limitations period – accrues each time a defendant fails to cure-or-
repurchase upon demand.
◦ Dispatches the argument that a defendant’s failure to cure upon demand
is a breach of contract independent of the alleged breach of
representations and warranties.
41
Rooted in well-established law
◦ Confirms the distinction between (i) statutes of limitations, which run from
the time a claim accrues, and (ii) contractually agreed-to conditions
precedent, which a party must satisfy within the limitations period.
Implications
◦ Bars a plaintiff from filing a summons with notice before (i) it provides
notice of an alleged breach; (ii) the cure-or-repurchase time expires.
See U.S. Bank Nat’l Ass’n v. DLJ Mortg. Capital, Inc., No. 652344/2012, NYSCEF No.
123 (N.Y. Sup. Ct. Jan. 3, 2014).
◦ Suggests that only loans for which a plaintiff provides a timely pre-suit
notice are actionable (no “notice for one is notice for all” rule).
◦ The result should be the same under so-called “accrual provisions”.
42
Issue: Must a responsible party repurchase liquidated mortgage
loans (or, when is a mortgage loan not a mortgage loan)?
No: District of Minnesota dismissed put-back claims for liquidated
loans on motion for partial summary judgment.
◦ Real property law: foreclosure extinguishes the mortgage loan
◦ Contract law
Trustee not capable of exchanging mortgage loan (which had been
extinguished and no longer is a trust asset) for the Purchase Price.
By definition, the Purchase Price for a liquidated loan is zero.
See MASTR Asset Backed Sec. Trust 2006-HE3 v. WMC Mortg. Corp., No. 11-cv-
2542, 2012 WL 4511065 (D. Minn. Oct. 1, 2012).
43
Subsequent decisions have held that questions of fact preclude
ruling on a motion to dismiss.
See MASTR Adjustable Rate Mortgs. Trust 2006-OA2 v. UBS Real Est. Sec. Inc., No. 12-cv-
7322, 2013 WL 4399210 (S.D.N.Y. Aug. 15, 2013);
Morgan Stanley Mort. Loan Trust 2006-14SL v. Morgan Stanley Mortg. Capital Holdings
LLC, No. 652763/2012, 2013 WL 4488367 (Sup. Ct. N.Y. County Aug. 16, 2013);
Deutsche Alt-A Sec. Mortg. Loan Trust, Series 2006-OA1 v. DB Structured Prods., Inc., No.
12-cv-8594, 2013 WL 3863861 (S.D.N.Y. July 24, 2013) (“DBALT”);
ACE Sec. Corp. Home Equity Loan Trust, Series 2006-SL2 v. DB Structured Prods., Inc.,
965 N.Y.S.2d 833 (Sup. Ct. 2013), rev’d on other grounds, --- N.Y.S.2d ---, 2013 WL
6670379 (App. Div. 1st Dep’t Dec. 19, 2013).
Ace and DBALT took issue, in dicta, with the District of Minnesota
court’s reasoning.
44
Beginnings and endings.
45
Plaintiffs
◦ Governmental actions
FHFA, FHLB, FDIC, NCUA
U.S. and state attorneys general
SEC
◦ Private actions
Defendants
◦ Sponsors
◦ Underwriters
◦ Depositors
◦ “Control Persons”
46
Allegations
◦ Misrepresentations that the loans complied with underwriting guidelines
◦ Misrepresentations about loan-level data
Owner-occupancy rates overstated
Loan-to-value ratio understated
Debt-to-income ratio
Claims
◦ 1933 Act
◦ Blue Sky
◦ Fraud
◦ Aiding & abetting fraud
◦ Negligent misrepresentation
47
Theme: whose rights may be vindicated, assuming a valid claim
exists
Issues
◦ Statute of Limitations and Repose
◦ Standing
48
Four issues (at least)
◦ Whether the American Pipe rule tolls the running of statutes of repose,
and not just the running of statutes of limitations?
◦ Whether statutes of repose may be lengthened or supplanted by
statutory provisions that extend the time in which certain governmental
entities may bring actions (so-called “extender statutes”)?
◦ Whether tolling agreements among potential litigants may toll the running
of limitations periods?
◦ Whether the American Pipe rule applies when the lead plaintiff in the
underlying class action lawsuit lacks standing to prosecute putative class
members individual claims?
49
American Pipe rule: the statute of limitations tolls for putative
members of an unsuccessful class who subsequently pursue the
claims that the class sought to pursue.
50
Issue 1: Does American Pipe toll statutes of repose?
◦ No, whether American Pipe tolling is considered equitable or legal.
See Police & Fire Ret. Sys. of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013),
pet. for cert. filed sub nom. Pub. Employees’ Ret. Sys. of Miss. v. IndyMac MBS, Inc., No.
13-640, 2013 WL 6185615 (U.S. Nov. 22, 2013).
◦ Yes. American Pipe tolling is legal, not equitable. Nat’l Credit Union Admin. Bd. v. Goldman Sachs & Co., No. 11-cv-6521, ECF No. 119
(C.D. Cal. Sept. 4, 2012) (confirming March 15, 2012 tentative ruling), appeal granted,
No. 13-80165 (9th Cir. Oct. 28, 2013), docketed as No. 13-56852.
51
Issue 2: Do extender provisions trump statutes of repose?
◦ Extender provisions
Section 1367 of the Housing and Economic Recovery Act of 2008, Pub. L. No. 110-
289 (“HERA”), codified at 12 U.S.C. §4617(b)(12) (pertaining to causes of action
brought by the Federal Housing Finance Agency, the conservator of Freddie Mac and
Fannie Mae);
Section 212 of the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, Pub. L. No. 101-73 (“FIRREA”), codified at 12 U.S.C. §1787(b)(14) (pertaining
to causes of action brought by the National Credit Union Administration Board, the
liquidating agent and conservator for federally-chartered credit unions); and
Section 221 of FIRREA, codified at 12 U.S.C. §1812(d)(14) (pertaining to causes of
action brought by the Federal Deposit Insurance Corp., the receiver for federally
insured banks).
52
Issue 2 (cont’d): Do extender provisions trump statutes of repose?
◦ Yes, in light of the legislative purpose, among other considerations .
See Fed. Hous. Fin. Ag. v. UBS Ams., Inc., 712 F.3d 136 (2d Cir. 2013), cert. denied,
JPMorgan Chase & Co. v. Fed. Hous. Fin. Ag., 134 S. Ct. 372 (U.S. Oct. 7, 2013);
Nat’l Credit Union Admin. Bd. v. Nomura Home Equity Loan, Inc., 727 F.3d 1246 (10th
Cir. 2013), cert. pet. filed sub nom. Nomura Home Equity Loan, Inc. v. Nat’l Credit
Union Admin. Bd., No. 13-576 (U.S. Nov. 8, 2013).
◦ No, in light of the statute’s plain language, which refers to “statute of
limitations” only, not “statute of repose”.
See Nat’l Credit Union Admin. Bd. v. Goldman Sachs & Co., No. 11-cv-6521, ECF No.
119 (C.D. Cal. Sept. 4, 2012) (confirming March 15, 2012 tentative ruling that the
NCUA’s extender provision did not supplant the 1933 Act’s statute of repose), appeal
granted, No. 13-80165 (9th Cir. Oct. 28, 2013), and docketed as No. 13-56851.
53
Issue 3: Do tolling agreements toll limitations periods?
◦ Tolling agreements may trump state law statutes of repose. See Nat’l Credit Union Admin. Bd. v. Goldman Sachs & Co., No. 11-cv-6521, ECF No.
119 (C.D. Cal. Sept. 4, 2012), appeal granted, No. 13-80165 (9th Cir. Oct. 28, 2013),
docketed as No. 13-56852.
◦ Tolling agreements may not trump a limitations periods provided by
extender provisions.
See Nat’l Credit Union Admin. Bd. v. Barclays Capital Inc., No. 12-cv-2631, 2013 WL
3471369 (D. Kan. July 10, 2013), appeal docketed, No. 13-3183 (10th Cir. July 18, 2013);
Nat’l Credit Union Admin. Bd. v. Credit Suisse Sec. (USA) LLC, 939 F. Supp. 2d 1113 (D.
Kan. 2013), mot. for reconsid. denied (July 10, 2013).
54
Issue 4: Does American Pipe tolling apply to claims for which the
lead plaintiff in the underlying class action lawsuit lacked standing? ◦ Yes (cases from outside the mortgage-backed securities litigation context).
See Griffin v. Singletary, 17 F.3d 356 (11th Cir. 1994); Haas v. Pittsburgh Nat’l Bank, 526
F.2d 1083 (3d Cir. 1975).
◦ No (cases from inside the mortgage litigation context).
See, e.g., Allstate Ins. Co. v. Countrywide Fin. Corp., 824 F. Supp. 2d 1164 (C.D. Cal.
2011) (citing cases).
◦ “Maybe”
Nat’l Credit Union Admin. Bd. v. Goldman Sachs & Co., No. 11-cv-6521, ECF No. 150
(C.D. Cal. June 11, 2013) (tentative ruling), confirmed as final ruling, ECF No. 166 (C.D.
Cal. July 29, 2013), mot. to certify issue for interlocutory appeal granted, ECF. No. 236
(C.D. Cal. Dec. 2, 2013), and pet. for interlocutory appeal filed, No. 13-80230 (C.D. Cal.
Dec. 6, 2013).
55
Offering-level standing
A putative class may pursue claims arising only from the offerings in which
the lead plaintiff invested.
See Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632
F.3d 762 (1st Cir. 2011);
Me. State Ret. Sys. v. Countrywide Fin. Corp., 722 F. Supp. 2d 1157, 1164 (C.D. Cal. 2010)
(“Maine State I”) (citing cases).
Tranche-level standing
A putative class may pursue claims arising only from the specific tranches
in those offerings in which the lead plaintiff invested.
See Me. State Ret. Sys. v. Countrywide Fin. Corp., No. 10-cv-0302, 2011 WL 4389689, at
*5-6 (C.D. Cal. May 5, 2011) (“Maine State III”).
56
NECA-IBEW Health & Welfare Fund v. Goldman, Sachs & Co.,
693 F.3d 145 (2d Cir. 2012)
Background
◦ Appeal from district court decision dismissing 1933 Act claims arising
from 15 of 17 offerings.
◦ District court applied offering- and tranche-standing rules.
57
NECA (cont’d)
Second Circuit reversed
◦ Class standing to pursue claims for offerings (or tranches) in which lead
plaintiff did not invest is not a function of Article III or statutory standing.
◦ “Common concerns” rule: lead plaintiff may pursue claims for offerings it
did not invest in, provided that the other offerings are backed by loans
made by the same originator that made the loans backing the offerings in
which the named plaintiff invested.
◦ Tranche-level standing: difference in tranche holdings does not implicate
such a “fundamentally different set of concerns” so as to defeat class
standing.
58
NECA (cont’d)
Implications
◦ The decision augments the in terrorem threat of 1933 Act claims.
◦ But the decision does not dismantle substantial barriers to plaintiffs’
claims, including originator-specific allegations and proof, and class
certification pre-requisites.
◦ There is a Circuit split, which the Supreme Court declined to take it up.
See Goldman Sachs & Co. v. NECA-IBEW Health & Welfare Fund, 133 S. Ct. 1624 (U.S.
Mar. 18, 2013).
◦ District courts within the 9th Circuit have rejected the rule. See In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig., 934 F. Supp. 2d 1219 (C.D.
Cal. 2013); F.D.I.C. v. Countrywide Fin. Corp., No. 12-cv-4354, 2012 WL 5900973 (C.D.
Cal. Nov. 21, 2012).
59
NECA (cont’d)
Implications (cont’d)
◦ The ruling prompted reconsideration of previously dismissed claims. In re IndyMac Mortg.-Backed Sec. Litig., No. 09-cv-4583 (S.D.N.Y. July 23, 2013) (reinstating
claims for six offerings after parties stipulated to reinstate claims relating to 36 offerings);
N.J. Carpenters Health Fund v. Res. Capital, LLC, No. 08-cv-8781, 2013 WL 1809767 (S.D.N.Y.
Apr. 30, 2013) (reinstating claims for 37 of 55 previously dismissed offerings);
N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc., No. 08-cv-5653, 2013 WL 357615
(S.D.N.Y. Jan. 23, 2013) (reinstating claims for one securitization that had previously been
dismissed);
In re Morgan Stanley Mortgage Pass-Through Certificates Litig., No. 09-cv-2137, 2013 WL
139556 (S.D.N.Y. Jan. 11, 2013) (granting motion for reconsideration and leave to amend claims
for 14 offerings).
But other actions already had settled.
60
And now for something completely different
61
Put-Back Litigation
◦ Impact of Ace decision
◦ Liquidation argument
◦ Settlement developments
◦ Indemnification
Securities Litigation
◦ Implications of NECA for class and tolling issues
◦ Settlement developments
◦ Indemnification
Enforcement – FIRREA
62
Underwriter/Sponsor claims against originator for indemnification
Generally, contract-based, but with a common law overlay.
◦ An indemnitee may not take steps to increase an indemnitor’s liability
◦ “Conflict” rules.
Robust defenses exist.
◦ Complaints are replete with damning allegations; time will tell whether the
factual record bears those out.
◦ Fraud is not indemnifiable as a matter of law.
◦ Sound argument that securities law violations are not indemnifiable as a
matter of law. See Globus v. Law Research Serv., Inc., 418 F.2d 1276
(2d Cir. 1969).
63
Valuation is an educated guess
◦ Put-Back Actions: Draw parallels to and distinctions from BNY-BofA
settlement; ResCap bankruptcy settlement/plan; publicly announced
settlements (mainly, monoline actions)
◦ Securities Actions: Draw parallels to and distinctions from the FHFA
settlements, class action settlements
64
Potential implications of U.S. ex rel. O’Donnell v. Countrywide Fin.
Corp., No. 12-cv-1422 (S.D.N.Y.)
◦ Driving settlement activity?
◦ Foreshadowing similar actions?
FIRREA liability is troubling ◦ 10-year statute of limitations.
◦ Regulatory subpoena power allows for “advance discovery”.
◦ Civil standard of proof for what essentially is a charge of criminal fraud
◦ Penalties can be substantial: $1mm per violation; $5mm for continuing
violation; and potentially up to the size of the loss or the amount of the
gain.
65
James K. Goldfarb
Partner
Murphy & McGonigle, P.C.
(212) 880-3961
Murphy & McGonigle provides litigation and enforcement defense, and regulatory and compliance counseling, to public companies, financial institutions, accounting firms, and their executives. The views expressed in this presentation are those of the presenter and do not necessarily reflect the views of the firm or its clients.
66